ECB set to bow to German pressure over QE Announcement of scheme likely to be made by Draghi next Thursday
The European Central Bank is set to unveil a programme of mass bond-buying next week to save the eurozone from deflation, but has bowed to German pressure to ensure that its taxpayers are not liable for any losses incurred on other countries’ debt.
Policy makers in Frankfurt are expected to take the momentous decision to embark on quantitative easing on Thursday, with the most likely option at this stage for the ECB to force the 19 national central banks that make up the eurozone to stand behind their own sovereign bonds.
Mario Draghi is likely to announce a 550 billion-euro ($635 billion) bond-purchase program this week and won’t skimp too much on the details, economists say.
Inflation Slows Amid Oil Rout U.S. consumers are seeing prices rise at the slowest annual pace in more than five years, largely thanks to a global plunge in oil prices, presenting a potential complication for the Federal Reserve as it looks to raise interest rates this year.
The consumer-price index, a broad gauge of inflation that measures what Americans pay for everything from coffee to gasoline and airline tickets, rose just 0.8% in December from a year earlier, the Labor Department said Friday. That was sharply slower than the 1.3% annual growth pace seen in November, and the lowest annual reading since October 2009.
On a month-to-month basis, Friday’s inflation report showed that falling energy prices helped drive prices down by a seasonally adjusted 0.4% in December, its largest one-month decline in six years. Core prices were unchanged last month from November.
The sharp drops in the price of gas and fuel oil last month were partly balanced by a 0.3% increase in food prices from November.
The national average price for a gallon of regular gas was $2.08 on Friday, down $1.22 from a year earlier, according to auto club AAA.
Excluding the volatile categories of food and energy, so-called core prices rose 1.6% on the year, slowing from a 1.7% annual gain in November and 1.8% annual growth in October. (…)
Past periods of declining oil prices also haven’t dragged core prices down in a significant way. In 1986 and 1987, falling energy prices sent headline inflation lower but core prices remained on a steadier path, a pattern repeated in the late 1990s and again in the early 2000s.
Here are the facts from the Cleveland Fed:
Total CPI has declined at a 4.2% annual rate in the last 2 months but core CPI is not showing signs of deflating as evidenced by trends in two measures of median CPI. The Cleveland Fed now produces daily nowcasts of PCE and CPI. Recent measures suggest that total CPI could drop 0.6% in January but core CPI is edging up 0.14% as of Jan.15. Total CPI could thus turn negative YoY in January (-0.1%) but core CPI would remain in the +1.7% range.
Milk sales set records in 2014, but plummeting prices are forcing some dairy farmers to spill the surplus down the drain.
Already disheartened by the current glut, which is due to global factors and overproduction, dairy farmers say they worry that futures markets predict dwindling prices in 2015. Over in the dairy aisle, though, shoppers are milking savings by the gallon. (…)
Dairy farmers recognize the volatility of the industry. Less than a year ago, they struggled to meet global demand and milk prices climbed to record highs – about $25 per hundredweight, or roughly the equivalent of a 10-gallon tank, according to Mark Stephenson, director of dairy policy analysis at the University of Wisconsin.
So, many farmers bought new equipment and expanded their herds to meet demand. But when China pulled back on its dairy imports after stockpiling milk powder and Russia imposed sanctions against the U.S. by halting trade, dairy farmers nationwide were left with a surplus, Stephenson said. (…)
And with an excess of milk in the international market, prices for milk, butter and milk powder continue to drop. Market predictions for 2015 look worse, Hardtke said, as prices are expected to drop through the spring – about $13.50 per hundredweight in March. Dairy Farmers of America, a national marketing cooperative, has started charging its 15,000 members 50 cents per hundredweight to account for additional transportation fees and low prices. (…)
Meanwhile, consumers are seeing milk prices slashed. (…)
Industrial production, which measures the output of U.S. manufacturers, utilities and mines, decreased a seasonally adjusted 0.1% from the prior month, the Federal Reserve said Friday. That followed a gain of 1.3% in November.
Capacity utilization, a measure of slack in the industrial sector, slipped to 79.7% in December from November’s revised reading of 80.0%. At the December level, capacity utilization was slightly below its long-run average.
Overall industrial output in December was up 4.9% from a year earlier.
“For the fourth quarter of 2014 as a whole, industrial production advanced at an annual rate of 5.6%, with widespread gains among the major market and industry groups,” the Fed said.
Manufacturing output, which accounts for about three-quarters of overall industrial production, climbed 0.3% in December, the fourth consecutive monthly increase. The sector was buoyed by gains for metals, computers and electronics.
Oil and gas drilling fell by 1.9% last month, the third straight drop, the Fed said.
November’s manufacturing figure was revised up to a 1.3% gain, from a previously reported 1.1% increase.
Regulatory Crackdown Hits China Shares A mountain of debt built up by Chinese investors eager to cash in on the soaring stock market crumbled, sending the stock market down 7.7%, its worst day in six years.
The collapse came after Chinese regulators disciplined three major brokers for violating rules on margin lending, that helped fuel China’s historic stock market rally with shares up 53% last year.
Margin lending rose 196% last year to just over one trillion yuan and was up another 9% in the first two weeks of this year, putting the balance at 1.1 trillion yuan ($177 billion) as of last Friday. (…)
In addition to the margin trading clampdown, the banking regulator also issued draft rules on the control of entrusted loans—a fast growing part of China’s shadow banking industry, where one company lends to another using a bank as an intermediary. Recent lending data shows that these loans grew by a record 458 billion yuan in December.
The rapid growth in entrusted loans connects to the stock market as there are concerns that this is where the debt ends up. The banking regulator said Friday that these loans weren’t to be used to invest in securities such as bonds and equities. (…)
CHINA ELECTRICITY CONSUMPTION rose 4.2% YoY in December after rising 3.3% in November and 3.1% in October. Total annual consumption for 2014 was
up 3.8% after 7.3% in 2013, 5.5% in 2012, and 12.0% in 2011.
On a month-over-month basis, prices in December slipped 0.4%, compared with a 0.6% fall in November, according to calculations by The Wall Street Journal. It was the fourth consecutive month that average prices fell less sharply than in the previous month.
On a year-over-year basis, the average price of new homes declined 4.3% in December compared with a 3.6% fall in November and 2.5% drop in October.
Excluding public housing, private-sector home prices fell in 68 of the 70 cities surveyed in December from a year earlier, unchanged from the 68 cities that posted declines in November, according to data posted by the National Bureau of Statistics on Sunday. On a month-on-month basis, home prices fell in 66 of 70 cities in December, down from November’s 67. (…)
Housing sales in the 70 cities surveyed rose 9% in December from November, due to adjustments in mortgage policies, the interest-rate cut and stepped up efforts by developers to reduce their inventories, said Liu Jianwei, a statistician at the National Bureau of Statistics in a statement on the bureau’s website. (…)
(…) staff for members of the Financial Stability Oversight Council, a group of senior U.S. regulators, spoke by phone Friday to discuss the market’s reaction and the impact on specific financial institutions, according to a person familiar with the call. The discussion didn’t suggest there was an immediate threat to the financial system, this person said.
The Swiss currency bombshell – cause and effect (Gavyn Davies)
(…) What will be the fallout this time? Many active investors were heavily short Swiss francs before last week, with JPMorgan estimating that Swiss franc borrowing by non residents is around SFr150-175bn. This will need to be unwound, with attendant losses. There could be some pockets of large losses by leveraged investors, though the market did not seem too worried about this on Friday.
Longer term, central banks’ forward guidance of all types may lose some of its earlier lustre. Global confidence may be shaken in asset prices that have been bloated by an increase in central bank balance sheets in excess of 20 per cent of GDP since 2008.
But the immediate response of the markets last week was telling: equity prices in the eurozone rose sharply, because investors took the SNB’s decision to mean that the ECB was on the brink of a larger-than-expected bout of QE. It seems that the markets’ Pavlovian response to every twist and turn in the central banks’ thinking has not ended quite yet.
One more thought. The SNB has now set a negative interest rate on sight deposit accounts of -0.75 per cent. This is much lower than the -0.25 per cent that had previously been assumed to be the effective lower bound on interest rates. If this proves effective, other central banks may follow suit. And, over time, that may take global bond yields even further into negative territory.
The world’s biggest energy consumer, China, faces significant downward pressure on its economy, its premier Li Keqiang was quoted by state radio as saying on Monday. (…)
Iraqi Oil Minister Adel Abdel Mehdi said on Sunday Iraq pumped 4 million barrels per day (bpd) of oil in December, its highest ever thanks to higher output from its southern terminals and a surge in supply from the north. (…)
Sharp drop in US rigs drilling for oil Survey underlines hit to shale developments due to fall in price
(…) The number of oil-directed rigs has now fallen 15 per cent from its recent peak of 1,609 in October last year. (…)
The total number of oil rigs working in the Williston basin, which includes the Bakken shale of North Dakota, has dropped by 34, or 17 per cent, since October, while the number in the Eagle Ford shale of south Texas has dropped by 32, or 16 per cent. The number in the Permian basin of west Texas is down 81 rigs, or 14 per cent.
The decline appears to be accelerating: the North American oil rig count has dropped by 170 in the past four weeks, compared to a decline of 38 in the preceding four weeks. (…)
Oil Boss Says More Job Cuts Lie Ahead Energy companies aren’t finished shedding jobs due to crude oil prices that are half what they were about six months ago, the top executive at oil-field services giant Schlumberger warned.
Energy companies aren’t finished shedding jobs due to crude oil prices that are half what they were about six months ago, the world’s biggest oil-field-services provider warned soon after disclosing 9,000 job cuts.
Paal Kibsgaard, chief executive of Schlumberger Ltd. , said on Friday U.S. oil producers that focus on shale fields are worse off than rivals elsewhere because of their higher costs.
“The new oil prices are clearly going to test the resilience of several North American land producers going forward,” he said, citing “their ability to get financing, their ability to continue to drive efficiencies and reduce costs and their ability to maintain production at current levels.” (…)
Schlumberger, Halliburton Co. and Baker Hughes Inc. will need to shrink further as clients demand price cuts and dial back spending on wells, Mr. Kibsgaard said while discussing quarterly earnings for his firm that fell 82% on more than $1 billion in charges including those related to downsizing.
The WSJ article curiously omitted to mention that Schlumberger boosted its dividend 25% on Friday. Also noteworthy, CEO Paal Kibsgaard said crude oil’s collapse is putting heat on SLB’s prices for drilling services and fracking in North America, but the that shale producers now want better technologies to squeeze more oil out of the wells they have already drilled. Next-generation fracturing fluids SLB introduced early last year have so far grown in sales at 4x the rate of its 2011 iteration – which was a fast grower on its own – as falling oil prices force oil companies to adopt new technologies faster and more broadly.(SA)
Without their investment, there is a growing risk that some of the U.K. North Sea’s remaining economically recoverable resources, estimated by industry experts at between 15 billion and 16.5 billion barrels of oil and natural gas, will end up as so-called stranded assets—hydrocarbons that are simply too expensive to develop. About 42 billion barrels have already been extracted since significant oil and gas output first began in the 1970s. (…)
Rates of return on North Sea oil and gas projects are currently about 15%, compared with 20% to 25% for other relatively mature offshore basins in politically stable countries, according to a recent report from the U.K. Treasury. Annual oil and gas production from the North Sea has fallen about 70% since its peak in 1999, to roughly 1.4 million barrels a day.
High and complex tax rates, as well as 15% annual inflation in rates for drilling rigs and other equipment, have kept costs high in the North Sea. In addition, much of the infrastructure, such as pipelines and platforms, is old and requires frequent investment in maintenance and repairs.
Even when oil prices were more than $100 a barrel, some 1.5 billion barrels of remaining North Sea oil were uneconomic to develop, according to consultancy Wood Mackenzie. Now, with Brent crude under $50 a barrel, a further 1.4 billion barrels currently being considered for a final investment decision could be under threat. (…)
President Barack Obama vowed to veto any legislation approving new economic sanctions against Iran, placing him on a collision course with the Republican-controlled Congress as U.S. diplomats seek to secure a deal curtailing Tehran’s nuclear program by July.
U.S. lawmakers, both Republican and Democratic, have been drafting new legislation to impose a new round of sanctions on Tehran if an agreement isn’t reached by a July diplomatic deadline.
Iranian diplomats have said they would pull out of the talks if the U.S. imposes any new sanctions on their country. (…)
Mr. Obama said the chances of reaching a deal are still less than 50-50, but the next several months of negotiations will determine “whether or not Iran can get to ‘yes.’”
If a deal isn’t reached, he said he would ask Congress to pass additional sanctions. (…)
U.S. diplomats have privately said they believe the steep plunge in oil prices over the past two months might gave the international negotiating bloc, known as the P5+1, additional leverage over Tehran.
Iranian President Hasan Rouhani said earlier this month in a televised speech that his country was likely to be incapable of recovering economically unless the international sanctions on Tehran were rolled back.
U.S. and European officials, however, have said in recent weeks that there were signs that hard-line politicians and security officials in Tehran were seeking to undermine Mr. Rouhani.
Earlier this week, an Iranian court indicted the Washington Post’s Tehran bureau chief on unspecified charges. U.S. officials have, in private, acknowledged it will be difficult to complete an agreement with Tehran while Iranian-Americans are being detained in the country.
After the first week:
From Zacks Research to Jan. 15:
Soft results from the major banks have given the 2014 Q4 earnings season an uneven start. But the picture appears to be relatively better outside of the Finance sector, even though the sample size of reports outside of Finance may not be representative enough at this stage.
Total earnings for the Major Banks industry, which includes all the universal banks and alone accounts for roughly 40% of the Finance sector’s earnings, are down -13.7% from the same period last year on -4% lower revenues, with only a quarter of the major banks beating earnings and revenue estimates.
(…) we now have Q4 results from 36 S&P 500 members that combined account for 11.8% of the index’s total market capitalization. Total earnings for these 36 companies are up +0.6% from the same period last year, with 69.4% beating earnings estimates. Total revenues are up a relative better +2.1%, with 44.4% beating top-line estimates.
The earnings and revenue growth rates for the 36 S&P 500 that have reported results are tracking below what we have seen from this group of companies in other recent quarters. With respect to beat ratios, a bigger proportion of companies are beating earnings estimates at this stage relative to other recent quarters, while the revenue beat ratios are on the low side.
Looking at the composite Q4 estimates, combining the actual results from the 36 companies that have reported with estimates for the still-to-come 464, total earnings for the index are expected to be up +1.3% on -0.7% lower revenues.
From Factset to Jan. 16:
With 7% of the companies in the S&P 500 reporting actual results for Q4 to date, more companies are reporting both actual EPS above estimates (84%) and actual sales above estimates (60%) compared to recent historical averages.
However, in aggregate, companies are reporting earnings and revenue below expectations to date. The aggregate dollar-level earnings reported by these 37 companies is 0.4% below the aggregate dollar-level earnings estimated for these 37 companies. The aggregate dollar-level revenue reported by these 37
companies is 1.2% below the aggregate dollar-level revenue estimated for these 37 companies.
As a result, even though more companies have beat earnings and revenue estimates to date than missed earnings and revenue estimates, the surprise percentage (which reflects the aggregate difference between actual results and estimated results) is negative for both earnings (-0.4%) and revenue (-1.2%).
Due to companies missing earnings estimates in aggregate and analysts continuing to revise earnings estimates downward for companies yet to report, the blended (combines actual results for companies that have reported and estimated results for companies yet to report) earnings growth rate for Q4 2014 is 0.6%, which is below the estimate of 1.7% at the end of the fourth quarter (December 31).
Due to companies missing revenue estimates in aggregate and analysts continuing to revise revenue estimates downward for companies yet to report, the blended revenue growth rate for Q4 2014 is 0.8%, which is below the estimate of 1.1% at the end of the fourth quarter (December 31).
Since the start of the first quarter, the estimated earnings growth rates for the first half of 2015 have declined. For Q1 2015 and Q2 2015, analysts are currently predicting earnings growth rates of 1.8% and 3.2%, respectively. These earnings growth rates are below the estimated growth rates of 4.0% and 5.2% for these same two quarters back on December 31. Similar to Q4, most of the decline in the expected earnings growth rates for both quarters can be attributed to analysts lowering earnings forecasts for companies in the Energy sector.
Analysts have cut revenue estimates for the first half of 2015 as well. For Q1 2015 and Q2 2015, analysts are currently predicting revenue growth rates of 0.3% and -0.3%. These revenue growth rates are also below the estimated growth rates of 1.6% and 1.0% for these same two quarters back on December 31.
Q4 estimates have declined 3.1% to $29.56 from their Dec. 31, 2014 level. More significant, Q1 estimates have been cut 7.2% to $28.37 (+3.8% YoY) while Q2 estimates are down 6.1% to $30.31 (+3.3% YoY).
As a result, trailing 12m earnings are now expected to reach $115.82 after Q4’14, up a low 1.1% in the quarter. Trailing EPS are seen rising 0.9% in Q1’15 and 0.8% in Q2’15. These would be the slowest gains in trailing earnings since the period between June 2012 and June 2013.
Taken in aggregate, earnings will not provide much of a tail wind for equities during the next 6 months. However, the expected collapse in Energy earnings will account for the bulk of the aggregate slowdown. Ex-Energy, earnings are expected to grow nearly 6% in Q1 and 9.5% in all of 2015. Excluding Energy, revisions to Q1 and 2015 estimates are marginally lower than they were in December 2014.